Understanding equity is a component that is quite important in financial analysis. Perhaps, you will hear equity as a term that is quite familiar when it is called capital. Well, this equity or capital is something that is needed to start a business. Then, if someone wants to start a business but doesn’t have the money, then what about the equity?
Regarding equity, it can also be connected with investors. The existence of investment can make a company easy to develop. Well, capital or equity is a very important role in business. Moreover, there are many elements of this equity.
Still confused? Come on, see the complete information below so that you understand more about equity and its ins and outs!
Definition of Equity
In accounting, the notion of equity is the difference between the value of assets and liabilities. Thus, equity can also be referred to as the residual rights held from the company’s assets but reduced by liabilities first.
Liability itself is a debt that must be repaid in the future and also services that must be performed in the future to other parties. Such as company debt and computer repair costs that must be done. If the liability has been paid, then this asset is then called equity.
In simple terms, the definition of equity is the amount of rights and interests of the company owner in the company’s assets. If you recall about the basic accounting equation, on the left side there are assets and on the right side are debt and equity.
Understanding equity in the language is equity or equity of ownership which means the net worth of the company. Equity is also formulated by the total of assets less total liabilities.
Equity is the voting rights of the company which is the difference between assets and liabilities. Thus, equity is not a measure of the selling value of the company, The value of equity can be seen simply through this formula. However, equity is not traded because it will affect the business. The amount of equity of the business owner or investor will be reduced if the policy is taken to withdraw money from the business being managed.
The value of equity is also not always positive. The value will be negative if the liability is greater than the asset value. A negative equity value is known as a deficit. In order for the company to know the value of equity, the company must manage it properly. Record all assets and liabilities owned so that profits can be obtained and not a deficit.
Element of Equity
Based on the definition of equity above, the elements of equity are divided into 5 things which include paid-in capital, contributed capital, undistributed profits, revalued capital, and other capital. Here are the five elements of equity, namely:
1. Paid-up capital
Paid-up capital is money or capital provided by business owners or investors in a certain amount. The purpose of paid-in capital as business development. There are two parts of the paid-up capital which include share capital and agio & disagio shares.
Share capital is a nominal amount of money or shares outstanding in a business. Meanwhile, the premium and disagio shares are the ratios of the number of shareholders to the nominal amount.
2. Profit Not Divided
Unshared profit is the remainder or the amount of company profits that have come from past years and have not been taken. However, this type of profit is not included as dividends. Rather than settle without clarity, it should be used as capital.
3. Revaluation Capital
This type of capital is obtained from the remaining capital from the previous period in the books of the next period. This is done so that the remaining capital from the previous period can be maximized to be used as additional business needs in the future.
4. Donation Capital
In terms of equity, there is contributed capital obtained from assets contributed by other parties.
5. Other Capital
This last element of capital is capital derived from reserves. Examples of bond reserves, price declines and much more.
Type of Equity
The value of equity is a component that can be used in financial analysis. The concept of equity can be applied to various aspects of life. Generally, the types of equity that are often used include shareholder equity, home equity, owner’s equity, and equity financing. You can see the full review below:
1. Shareholders’ Equity
This type of equity is the amount of money returned to shareholders if all company assets are liquidated and all debts owned have been paid. The value of equity that is most often discussed in everyday life is shareholder equity.
2. Home Equity
Home equity is the value of the home minus the amount owed on the mortgage. This type of equity value is very important for people who want to sell or buy a house in order to make a profit. If he borrows money from the bank to buy a house and the selling price exceeds the value borrowed from the bank, then his equity value is positive.
3. Owner’s Equity
Not much different from shareholder equity, this type of equity is also applied to businesses that are not listed on the stock exchange. A form of business with owner’s equity, all profits will go to the business owner. The value is also the value of the owner’s equity.
4. Equity Financing
Equity financing can be used if the company has a successful business. However, the entrepreneur does not make a profit. The way to get around this is that shares can be sold to investors. Then, the sales proceeds are used to finance the development of the company.
In more detail, the following will discuss shareholder equity and share equity.
Shareholders’ Equity
As discussed earlier, the notion of shareholder equity will be returned to shareholders if all assets are liquidated and all debts have been paid. This type of equity is often used as a reference factor in determining the financial condition of a company whether it is healthy or not.
This value is important because it represents the value of investors in a company. This value can also be used as a reference for investors in determining their interest in the company.
The value of shareholder equity can be a positive or negative number. If the assets are sufficient to cover the liabilities, the equity figure will be positive. However, if the liabilities are more than the assets, then the equity becomes negative.
Stock Equity
In investment, equity refers to the activity of ownership and purchase of shares on the stock market and stock exchange. Shareholders will usually buy shares in anticipation of getting income from dividends ( capital gains ). Shareholders will also receive voting rights on the candidate board of directors.
To assess whether equity is more expensive or less expensive, it can be calculated by comparing it to government bonds over a long period of time. This difference is called the yield gap or yield ratio.
Conclusion
After you get to know the meaning of equity in-depth, the next step for you business owners is to make the value of your equity bigger so that the business entity also becomes more developed.